On March 18, 2020, the Delaware Supreme Court issued a decision in Salzberg v. Sciabacucchi, No. 346, 2019, 2020 WL 1280785 (Del. Mar. 18, 2020) declaring as facially valid federal forum provisions (“FFP”) in Delaware corporation bylaws requiring claims under the Securities Act of 1933 (“Securities Act”) to be brought in federal court. Under these FFPs, corporations designate the federal courts as “the exclusive forum for the resolution of claims under the” Securities Act. Sciabacucchi, 2020 WL 1280785, at *3. By way of background, the Securities Act authorizes, inter alia, claims under Section 11 for false and/or misleading statements in a company registration statement issued in a public offering. Id. at *2. The following FFP is an example of the provisions enacted by, inter alia, Blue Apron Holdings, Inc., Roku, Inc., and Stitch Fix, Inc. prior to their initial public offerings:
Unless the Company consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933. Any person or entity purchasing or otherwise acquiring any interest in any security of [the Company] shall be deemed to have notice of and consented to [this provision].
Id. at *1.
Previously, the Delaware Court of Chancery held that these provisions were facially invalid primarily because “constitutive documents of a Delaware corporation cannot bind a plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware’s corporate law.” Id. at *3. The FFPs, the Court of Chancery reasoned, “attempt to accomplish that feat” and were therefore “ineffective and invalid.” Id.
The Delaware Supreme Court reversed the Court of Chancery, reasoning that the FFPs are in fact facially valid because they fall within the “broad categories” authorized by § 102(b)(1) of the Delaware General Corporation Law (“DGCL”). Id. at *4. Specifically, the court found that the FFPs fell within the following two categories of provisions authorized by DGCL § 102(b)(1): (1) “any provision for the management of the business and for the conduct of the affairs of the corporation[;]” and (2) “any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders, . . . if such provisions are not contrary to the laws of [Delaware].” Id.
Among other things, the Delaware Supreme Court noted the rise in Securities Act class actions filed in state courts after the United States Supreme Court issued its decision in Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund, 138 S. Ct. 1061 (2018) holding that state and federal courts have concurrent jurisdiction over Securities Act class actions. Id. at *5. The Delaware Supreme Court reasoned “that no procedural mechanism is available to consolidate or coordinate multiple suits in state and federal court” and that “[b]y directing 1933 Act claims to federal courts when coordination and consolidation are possible, FFPs classically fit the definition of a provision ‘for the management of the business and for the conduct of the affairs of the corporation.’” Id.
The full decision is linked below:
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